Speculation Arises as Huge Amounts of Capital Flow into China ETFs

A surge in inflows to four Exchange Traded Funds (ETFs) tracking China’s CSI 300 index has sparked speculation about the involvement of Beijing’s “national team” in supporting the economy.

According to Shanghai-based consultancy Z-Ben, these four ETFs attracted $4.4bn in just eight trading days, bringing their combined assets to over $25bn. The notion of a national team refers to large state-affiliated institutions that intervene to stabilize the stock market.

This speculation gained momentum after China’s politburo meeting on July 24, where leaders pledged to enhance the economy and increase residents’ income through expanding consumption.

Among the four ETFs, the Huatai-PineBridge CSI 300 ETF has broken records by exceeding Rmb100bn ($13.8bn) in assets under management (AUM). The other three ETFs are provided by ChinaAMC, Harvest, and E Fund.

Ivan Shi, head of research at Z-Ben, expressed uncertainty regarding the involvement of the national team. Although he suspects their presence, he believes the recent inflows are different from those of the past three years.

“My view is that the recent inflows are distinct from the past three years,” Shi stated. “While I cannot confirm the involvement of the national team, I suspect their presence.”

Following the politburo meeting, the CSI 300 experienced a 5.7% increase over two weeks but later relinquished a significant portion of these gains, settling for a 2.1% increase by August 11. Despite this modest rally, the index still remained 33% below its February 2021 peak.

Phillip Wool, managing director and head of research at Rayliant Global Advisors, shared his perspective on the recent trend. Although he wouldn’t be surprised if state-owned allocators were investing in ETFs, he noted a shift towards a lighter touch by the national team.

Wool stated, “Some domestic investors have been disappointed by the lack of state support for local stocks.” He does not anticipate the same level of support seen in 2015.

He likened the national team’s approach to that of a contrarian investor with a deep value bias, investing during periods of pessimism. However, he acknowledged their selective focus on certain sectors, such as financial stocks within the CSI 300.

Wool also drew attention to Japan’s precedent, where the Bank of Japan purchased equity ETFs tied to the domestic Topix and Nikkei indices as part of monetary easing measures. By March 2023, the bank held $266bn in ETFs.

Thomas Gatley, senior analyst at Gavekal, emphasized that the recent inflows, although substantial, are minuscule compared to the average daily turnover of Shanghai and Shenzhen’s stock market, which ranges between Rmb600bn and Rmb1.2tn this year.

Gatley noted that national team activities within ETFs would be harder to detect in the future as the amounts involved increase. “If we start discussing ETFs holding trillions of renminbi in stock exposure, it will be much more challenging to determine whether the national team is involved or not,” he remarked.

Additional reporting by Steve Johnson